Monday, June 14, 2010

Public sector unions just won a huge victory in Rhode Island, with the signing into law of legislation denying municipalities the ability to file for state receivership as a means of renegotiating unsustainable union contracts.

I previously highlighted the state receivership filing by the City of Central Falls, Rhode Island, which is being crushed by a variety of economic factors, particularly municipal employee union contracts.

The receivership was a way in which a court-appointed receiver could do what the City itself could not do, put its finances in order, among other ways by renegotiating union contracts.

As I documented, the unions feared a domino-effect whereby other towns would take similar action. The likelihood of other municipalities filing receivership was small, in reality, because of the negative effects on the ability to borrow. But the credible threat of filing receivership, demonstrated by Central Falls, shifted bargaining power to the taxpayers.

Now the RI general assembly, which is completely controlled by Democrats including many union members, has passed legislation effectively neutralizing the Central Falls receivership. Instead, there now will be a three-step process controlled by state government, to oversee and if need be, restructure, municipalities which are in trouble.

The rationale was that the Central Falls filing had worried bond rating agencies that it was too easy for RI municipalities to file for receivership; lower bond ratings would have meant higher borrowing costs:

State officials, led by acting Director of Revenue Rosemary Booth Gallogly, said the legislation was needed immediately. The Central Falls’ filing has municipal bond-rating companies concerned that it’s too easy for Rhode Island cities to seek state bankruptcy and possibly avoid paying off bond holders, she said.

An array of state public employee unions spoke in favor of the bill, but asked that union contracts not be broken and, if layoffs were needed, existing contractual procedures would be used.

Unfortunately, Republican Governor Donald Carcieri just signed the bill, presumably because of the bond rating concerns.

The new legislation politicizes the current judicial function of receivership in favor of a political function controlled by the state. Given the enormous influence the unions have over the state, there is little likelihood that the single biggest fiscal problem would be addressed as part of the state oversight. Public sector unions now have even more bargaining power, with the threat of judicial intervention all but removed.

The legislation also amounts to a de facto takeover of municipal finances by the state since all municipalities are subject to the review procedures.

There was a hope that the Central Falls receivership would help not only Central Falls, but all the other municipalities which are choking on union contracts they cannot afford.

That hope now is gone, as municipalities have little remaining bargaining power to address union contract issues. Municipalities no longer can say, "see you in court," and instead are left to the mercy of a state controlled by the unions.

Carcieri said he supported the bill because it allows the state to step in "at the first sign of trouble" and allows it to "exercise varying levels of support and control, depending on the circumstances."

The governor also said the bill will provide "fiscal stability" for Rhode Island's municipal credit markets, easing concerns raised by bond rating agencies that it was too easy for Rhode Island communities to seek receivership and possibly avoid paying off bond holders.

Donald Carcieri has been a good Governor, a Republican fighting a long and very hard fight against an overwhelming Democratic majority in the pockets of public sector unions. But he got it wrong on this one in the big picture, because while credit rating agencies are important, this move simply will embolden unions not to give necessary concessions thereby perpetuating the fiscal crisis in Rhode Island -- which also will affect bond ratings.

8 comments:

This is fine. It will give the unions and the left a chance to show that they are able to get the state's finances and budget in order without renegotiating the union contracts. As this is almost impossible, Rhode Island will serve as a viable pitri dish for the rest of the country, just as the Massachusetts health care structure is showing how government controlled health care is not a sound idea. What is even better is that RI is the smallest state in the union, so the effect of the legislation is minimized. We must let the idea play itself out to effectively shoot such an idea down in the future. With a little luck, this could turn out to be a very good example of how union and government tagteam corruption can destroy a state.

I don't know much about public financing, but it seems a bit more consistent with our constitutional values for a municipality's fiscal crisis to be managed by elected state officials, who are theoretically accountable to the voters, rather than by an appointed receiver and a judge.

I think your readers need to understand this is as much a bailout for the municipal bond investors as it is for the public sector unions. And you can be sure the municipqal bond investors lobbied just as hard to be made whole as did the unions.

While I 100% agree that the unions have over-reached by every measure, the bond investors willingly financed that over-reach. They believed "the market" would always be there to refinance them. (This is the exact same mistake the U.S. Treasury is making.)

Maybe it's time for all the self interested parties, rather unions or investors, to stop lobbying Rhode Island legsilators and allow the market to work.

Question for Professor Jacobson: Could the municipalities dissolve their incorporation rather than go into receivership? I mean, if there's no money and no one able to manage the place, can the state force them to remain in existence just to employ union members? If I were managing Central Falls, I'd walk out and mail the keys to city hall to the county or the state.

The cities should fight back but they are likely dominated by unions, too. Sad.

1. Does this mean the state will pay what the municipality claims it cannot pay?

2. If the municipality had the power to go into receivership when it entered into the union contracts, hasn't the legislature now interfered with those contracts by coercing more security from one party to the other party than existed when the contracts were formed? Isn't there thus an argument to be made that only prospective obligations cannot be discharged or renegotiated in receivership?

3. Are municipal residents personally on the hook for obligations of the municipality? If not, I think I'd just dissolve and live an unincorporated life.

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